Let’s be clear here—taxes suck. They’re not only incredibly boring but also unnecessarily complex. But if you’re starting your new business in the state of Florida and NEED to get your head around them, don’t stress. I’ve got the tax advice you need.
Understanding Florida taxes will set you up for success. Individuals do not pay state income tax in Florida and are not required to file a tax return with the Florida Department of Revenue. A small business can avoid state taxes by understanding the various business models and which of them pay state income taxes on top of federal corporate income tax.
I’ve broken down business taxes in Florida by the six different business entity types with all the details you need to know.
Sole Proprietorship
Sole proprietorships are the simplest and most common business type. Under this business structure, small business owners also conduct the work of the small business. A few examples of these could be a kid selling lemonade in their yard, a computer geek repairing smartphones, or a craftsman building and selling his own wood furniture.
In each of the examples, the entrepreneurs are the business. Legally and financially, these are one and the same. Because of this, the business and the business owner can be potential targets of a lawsuit. For example, if the lemonade makes someone sick, or the smartphone isn't repaired to how the customer imagined, or the customer breaks the craftsman’s chair and is injured in a fall, and the business gets sued, the lawyers can go after the business owner’s personal finances and assets as recompense.
Due to the business owner’s legal exposure, some entrepreneurs establish an LLC to protect themselves from legal and financial risks. So if a customer were to sue the business, the owner wouldn’t be a possible target of the lawsuit, under some LLCs.
Sole Proprietorship Taxes
When you file to pay federal income tax, the number the government really wants in the end is the total profit, or net income, you and your business made throughout the calendar year. You will need to pay taxes on that amount. Thankfully, you can easily calculate this number by getting the total amount of money your company made versus the required costs of doing business. The simple formula is sales minus expenses equals profit. Yes, this number can be negative.
For a lemonade stand, the sales are easy to calculate.
Imagine the kid sold $100 worth of lemonade throughout the year. Great, that’s the sales number. But in order to run the lemonade stand, the kid had some expenses: the cups, the stand, and, of course, the lemonade itself. The kid was smart, kept receipts, and at the end of the year easily determined the total expenses to be $40.
So the profit of the lemonade stand would be $100 (gross income) minus $40 (total expenses), for a net income of $60. That kid would have to pay federal tax on the $60 they made during the calendar year.
Business expenses can be related to the operations and start-up costs of the business. These expenses may include the cost of equipment, advertising, travel, meals, and entertainment. Additional deductions can be found on the IRS website.
So if the lemonade kid had spent $10 on printing flyers to hang up around the neighborhood, that $10 could be deducted from the total profit.
Keep in mind, the federal government wants businesses to do well and helps where possible.
The key to avoiding trouble with the IRS is having a good system for identifying and tracking your business’s sales and expenses with the use of receipts.
One advantage of sole proprietorships is that your small business is exempt from paying Florida corporate income tax. For tax purposes, your business income would be combined with your individual personal income, and that total would be the federal taxable income. If you were to run this business on the side while working full time for an employer, the business’s taxable profits would be combined with the ordinary income earned from your job and taxed as regular employment income at the standard federal tax rate.
These small businesses will save on Florida corporate income tax and state income tax. The owners will pay taxes only on their federal tax return.
Tax Documents
As a small business owner, you will need to familiarize yourself with a few IRS forms when filing your taxes in Florida. These forms include the standard Form 1040 for personal income tax returns and a Schedule C Form. The IRS recommends filing these forms quarterly throughout the year.
The Schedule C Form is the Profit or Loss from Business form from the IRS. This is where those receipts will come in handy for calculating your business’s total income and expenses. The IRS divides expenses into multiple categories, including vehicles, insurance, office expenses, travel, meals and entertainment, and utilities.
Partnerships
Partnerships consist of two or more entrepreneurs joining up to create a new business. The partners can decide the different tax options and legal exposure based on the type of partnership structure they choose. Partners are required to report their share of the business income federally, but they will not pay state income taxes, per Florida law.
General Partnership
In general partnerships, each of the partners has the power to make decisions for the partnership. Under this structure, the profits and losses of the business are also shared equally between the partners. Each partner will pay taxes in Florida on their share of the company profits. This structure requires solid partners, since negligent partners can expose your personal assets as a liability on top of the business’s debts.
Limited Liability Partnership
A limited liability partnership (LLP) contains general and limited partners. Silent partners may also operate under this type of arrangement. The general partner runs and manages the business and is responsible for the business’s debts and liabilities. The limited partner, as well as the general partner, benefits from the business’s profits. This structure protects the limited partner should the general partner screw up and cause the business to be sued.
Limited Liability Limited Partnership
Limited liability limited partnerships (LLLP) extend the liability protections of the limited partnership to the general partner. The LLLP is a recently created business structure recognized by the state of Florida but not yet recognized by all states. Due to this, it may be smarter for some small business owners to form an LLC or a corporation instead.
Partnership Taxes
In each of the partnership structures, just like the sole proprietorship, the business income is taxed the same way. The business’s income is split between the partners and reported on their personal income tax return along with their ordinary income.
Much like a sole proprietorship, the profits, expenses, and deductions from the tax year will need to be calculated and reported.
Partners are not employees and should not be given W-2 forms.
Tax Documents
The partnership will need to file and submit a Form 1065, Return of Partnership Income. This is a partnership version of the Schedule K form. Additional documents will be required for the taxes collected throughout the year. These forms can be found on the IRS partnership website.
As an individual partner of a partnership, you would need to file Form 965, for tax liabilities, and Schedule E, for supplemental income, alongside the standard Form 1040. There is plenty of tax preparation software that can make this process easier.
Limited Liability Companies (LLC)
An LLC is a business structure that liability-wise separates the business from the owners. The LLC provides more protection of the assets and legal exposure versus sole proprietorships and partnerships.
For more information, read my comprehensive guide to starting your own LLC.
Operating as an LLC, the business is not required to have share or stockholder meetings, unlike traditional corporations.
Single-member LLCs can be created by an individual, but the risk is fuzzy legal interpretation of where the individual ends and business begins. This may allow the personal assets of the single member to be exposed as a liability. I recommend a multimember LLC to avoid this situation and protect the member’s personal assets.
LLC Taxes
You may have heard that some LLC’s are used as pass-through entities for tax purposes. This allows the LLC to pay federal income tax on the business income at the individual federal income tax rates instead of Florida’s corporate tax rates. Florida state tax law classifies most LLCs as disregarded entities, and because they are not corporations, they do not pay state income tax in Florida.
The business owner would not pay Florida’s corporate income tax on the business’s profits if they pass them through to themselves. By doing this, you can avoid being taxed twice, at the corporate profits level, as well as a second time at the individual income.
An LLC is a great option for protecting your personal assets while taking advantage of the income tax benefits. The low cost of starting an LLC in Florida should encourage an entrepreneur to go this route.
If an LLC is incorporated in Florida, they will be required to pay state income tax at the tax rate of 3.3%, which is the alternative minimum tax, or 5%. The alternative minimum tax is set due to corporations having the ability to lower their standard tax rate through incentives and credits. The corporations are required to pay tax at the higher tax rate.
Tax Documents
The required tax documents for an LLC are similar to the other business structures.
The taxes of a single-member LLC will be similar to that of a sole proprietor. You would report the business’s profits, deductions, and expenses from the tax year on the Schedule C form along with your typical Form 1040 document.
Under a multimember LLC, each of the members will report their share of the profits and expenses, much like in a partnership. They will be required to file a Form 1065 and a Schedule K-1 form that reports their share of the income, losses, and deductions. Each member will also need to file the Form 1040 document.
If your LLC has employees, there are additional forms required to pay the payroll taxes. You will need to familiarize yourself with Forms 940, filed annually, and 941, filed quarterly.
Corporation
There are two types of corporations in the US, C corporations and S corporations. Their differences impact how they pay corporate income tax.
A C corporation would be a big-brand type of company that pays federal income tax and state income tax when it files a corporate income tax return. The shareholders and employees of the company are also taxed at the individual level for their income and dividends. This is known as “double taxation.” The state income tax for C corporations is 5.5% in Florida.
An S corporation is a corporation Florida recognizes for its special tax status, which it must qualify for by meeting IRS requirements. The requirements are being a domestic corporation, having fewer than 100 shareholders, having distributed one type of company stock, and not having outside investors. Outside investors are classified as corporations, partnerships, or nonresident aliens. S corporations are pass-through entities when it comes to paying federal income taxes.
Corporation Taxes
Despite their large size, corporations can deduct their taxes much like a small business for items such as salaries, bonuses, retirement plans, insurance, and other fiscal benefits they provide.
A Florida corporation needs to file a corporate income tax return and pay state and federal taxes quarterly. C corporations file a tax return for the corporation's income, while their shareholders report the dividends they may have received on their personal tax returns.
S corporations file a corporate tax return as well. However, their shareholders will report their share of the corporation's income, losses, and expenses on their individual income tax returns and pay the corporation's taxes. The S corporation avoids paying any corporate taxes by passing them through to the shareholders.
Tax Documents
C corporations file federal corporate income taxes using Form 1120. Those that qualify as S corporations use Form 1120-S. Once again, similar to multimember LLCs and partnerships, a Schedule K-1 form is required for the shareholders of a S corporation along with their Form 1040.
Conclusion
Becoming a small business owner is a great investment in your future, especially in the tax-friendly state of Florida. Understanding the various tax requirements will give you confidence in choosing the best business structure for your endeavor.
If your business conducts business out of state, a tax advisor can help determine whether nexus rules apply. Florida requires out of state business to pay tax on sales exceeding the $100,000 threshold.
By keeping accurate records, contacting a business advisor when necessary, using the correct tax forms, and following the IRS’s recommended yearly or quarterly reporting deadlines, stressing over taxes in Florida will become a thing of the past.
